Getting it right when it comes to vacation pay

Vacation pay requirements can keep payroll practitioners on their toes

By Sheila Brawn

07/14/2014|Canadian Payroll Reporter|Last Updated: 07/14/2014

When employees think of vacation, they may think of relaxation, adventure or just time away from work. But for payroll practitioners, employees’ vacations can mean stress and extra work. Not only do they have to make sure they pay employees the correct amount for vacation pay, they must also ensure they comply with legal (and possibly collective agreement) requirements for when to pay it.

Getting it right is important, says Theodora Lindsey, a payroll consultant with Carswell’s Payroll Consulting Group in Toronto. "You want to use best practices with employment standards because it’s all about preventing problems."

Failing to properly pay vacation pay could cause problems for employee morale and, from a legal perspective, lead to complaints and fines from employment standards boards.

When an employee takes time off for vacation, each Canadian jurisdiction requires that employers pay them vacation pay within a specified time period. The time period can vary depending on the jurisdiction. For example, in some provinces, including those in Atlantic Canada, payroll must be ready to pay the employee at least one day before the vacation begins.

In British Columbia, employers must pay it at least seven days before the vacation. This is required "to ensure that an employee has use of earned vacation pay on their holidays," according to the Interpretation Guidelines Manual for the province’s Employment Standards Act.

Some jurisdictions, such as Saskatchewan, allow employers to pay vacation pay on the regular payday that falls during an employee’s vacation. However, if an employee requests that the employer pay it before the vacation, the employer must do so.

Ontario requires that employers pay vacation pay in a lump sum before the start of the vacation, although if employees are paid by direct deposit or the employee’s vacation is less than one week, employers may pay it on or before the payday that relates to the pay period in which the worker took the vacation. Employers and employees may also agree in writing that vacation pay will be paid at a different time.

Meeting the payment deadlines should not be a problem if payroll knows in advance when employees are taking vacation, Lindsey says. Problems can arise when vacations come up at the last minute or when managers do not submit vacation paperwork on time.

Annie Chong, manager of Carswell’s Payroll Consulting Group, says late notice of vacations can be a problem in jurisdictions that require employers to pay vacation pay before the employee goes on vacation.

"You may have to (cut a manual cheque) because the requirement is to provide the payment prior to the commencement of their vacation."

To stop this from becoming a regular practice, payroll departments should make sure other managers understand the importance of deadlines, she says.

"As a payroll lead, I would go back and advise the manager in the future ‘This is what is causing us to scramble last minute to get a cheque to the employee,’" says Chong. "All of your internal players have got to understand that we have deadlines that we have to meet in payroll and everyone has to co-operate and understand what those deadlines are."

Some employers pay vacation pay with each pay rather than waiting until employees take their vacation. Chong and Lindsey say this is fine as long as it is allowed in the jurisdiction in which the employee works, and the employer complies with any requirements to first obtain the employee’s written agreement.

In some jurisdictions, under certain circumstances, employees may waive their right to take a vacation in a given year. Payroll must still ensure the employees receive their vacation pay and must generally pay vacation pay within the legislated timeframe for taking vacation after earning it (for example, within 10 months of entitlement). Check the legislation in the applicable jurisdiction for exact requirements.

Termination pay

Paying out vacation pay on termination can also pose a challenge for payroll. Each jurisdiction requires that final payments (including vacation pay) be paid to terminating employees within specific time periods. Some jurisdictions allow for more time than others.

Changes to the Canada Labour Code that took effect April 1, for example, give employers 30 days to pay vacation pay when there is a termination. Previously, they had to pay it immediately.

British Columbia only gives employers 48 hours to pay outstanding vacation pay if they end the employment relationship. If the employee quits, the deadline for paying the vacation pay is six days. For payroll, the 48-hour turnaround can cause headaches, Lindsey says.

"Scramble, scramble, scramble. We get all kinds of calls all the time saying, ‘Oh, B.C. says 48 hours. Is that (including) the weekend? I can’t get the cheque ready; I need signatures’ and all this. But it’s 48 hours so to make it happen, they have to scramble."

While payroll cannot control the timing of terminations, Lindsey says they can be prepared by ensuring they know the requirements in their jurisdiction.

Recovering pay in advance

Another area that can cause headaches for payroll is trying to recover vacation pay paid in advance. Sometimes employers advance vacation pay to an employee before the employee has earned it. This may not be a problem unless the employment relationship ends before the employee accrues the vacation time for which they were paid.

In jurisdictions such as Prince Edward Island, Newfoundland and Labrador, and under the Canada Labour Code, employers can require the employee to pay back the excess amount. In other provinces, such as British Columbia and Ontario, they will need the employee’s written permission to recover the money. Lindsey says this may be almost impossible after an employee has left the job.

Rather than waiting until the employer needs to recover the money to get permission, she says employers should have employees agree to repayments in advance.

"Either get something written in your company policy or contract of hire, or on a vacation request, like ‘I, Theodora Lindsey, authorize Thomson Reuters to deduct any overpayments on my final pay.’ That way you can recoup the advance. If you don’t have anything in writing, then the employee is just looking at it as a gift."

The ideal time to get employees to sign the statement is when they are hired, adds Chong. Employers will also have to make sure they get something in writing from existing employees.

"You definitely want to, as an organization, look at renewing the policy and having new signatures (from all staff) just so that you have it on file in the event that (they) do take more than they are entitled to," she says.

"Payroll should probably get HR involved because I would think that this is more of an HR responsibility. Certainly payroll needs to communicate the requirements to HR, but HR needs to enforce that within every organization."

Before paying vacation pay, payroll must also ensure the payment is for the correct amount. Employees have to receive a minimum of four per cent of vacationable earnings for vacation pay (except for Saskatchewan, which specifies 3/52s). Most jurisdictions increase the requirement to six per cent after a specified number of years of employment (or 4/52s for Saskatchewan).

"Defining vacation earnings is very, very important because that increases the value of their vacation pay," Chong says, adding that vacation pay can comprise more than the employee’s regular earnings. Depending on the jurisdiction, it can include other payments such as overtime, work-related bonuses, statutory holiday pay and previously paid vacation pay.

For this reason, Chong says it is important that all employers have a vacation reconciliation process that clearly defines the vacation year period and which payments paid in that time are included when calculating vacation pay. Otherwise, payroll may shortchange employees.

"That’s a really important element to paying out vacation pay which a lot of companies, to my surprise today, do not do," she says.

Reconciliation process

Properly tracking vacation time in the reconciliation process is also important, says Chong — especially for the Record of Employment (ROE).

"With Service Canada, you have to ensure that you are tracking insurable hours when the employees are physically taking their vacation. A lot of companies don’t do that."

This can sometimes mean individuals are short hours when they apply for employment insurance benefits. To avoid this, Chong suggests that the tracking of vacation hours be part of every employee’s vacation record. She advises payroll practitioners to use the chart that Service Canada publishes in its How to Complete the Record of Employment Form guide to know which earnings attract insurable hours.

"(The chart) tells them exactly what they should set up on their payroll system to track those hours," she says. "When you’ve got that system all set up, then every pay it’s going to attach the necessary hours. When it’s time to produce your record of employment, it’s just a matter of moving those numbers over to your ROE."

Both Lindsey and Chong say that by knowing the vacation pay requirements in their jurisdiction, payroll practitioners can help to ensure that the employer complies with the law. Sometimes, though, despite payroll’s efforts to do everything right, practitioners can run into problems because company management does not want to pay vacation pay within the required timeframe or include certain earnings when calculating vacation pay.

Fear of reprisals

Chong says this can put payroll practitioners in a difficult position, knowing they need to comply with the law, but fearing reprisal for not following their employer’s instructions. She advises payroll practitioners to do what they can to influence change within their organization by putting together a case to sway the employer.

"Justify your position and (state that) ‘These are the requirements.’ Also let them know what the consequences are if you are not in compliance," she says.

Sometimes this will persuade employers to change their view and sometimes it will not, she says. "At the end of the day, if they don’t want to make changes or they don’t care, then be prepared (for the consequences)."

SIDEBARDeadline for paying vacation pay

Canada Labour Code: Within 14 days before a vacation begins; however, employers may pay it on the employee’s regular payday during or immediately after the vacation if it is not practical to pay it that way or if it is the established practice in the workplace.

Alberta: It may be paid at any time but it must be paid by the next regularly scheduled payday after an employee’s next annual vacation begins.

If an employer has not fully paid the vacation pay before an employee’s vacation begins, the employee may request that the employer pay the amount owing at least one day before the vacation starts, and the employer must do so.

Employers are also allowed to pay vacation pay with each pay.

British Columbia: At least seven days before an employee begins vacation. Employers are allowed to pay vacation pay on an employee’s scheduled paydays, if the employer and employee agree to this in writing or it is part of a collective agreement.

Manitoba: Employers can decide when to pay vacation pay, but they must pay it by the employee’s last work day before the vacation begins. Employers are allowed to pay vacation pay with each regular pay.

New Brunswick: At least one day before employees begin their vacation.

Newfoundland and Labrador: At least one day before an employee begins vacation. Employers may also pay vacation pay each pay period as long as they inform the employee and show the amount of vacation pay in their payroll.

Northwest Territories:At least one day before an employee begins vacation.

Nova Scotia:At least one day before employees begin their vacation. Employers may pay vacation pay with each pay, but employers that wish to do this must clearly inform employees and keep records that show they notified them.

Employers must also identify vacation pay on an employee’s pay slip and maintain payroll records that show that vacation pay has been paid.

Nunavut: At least one day before an employee begins taking vacation.

Ontario: In a lump sum before the vacation begins. The Employment Standards Act, 2000, provides some exceptions: If employers pay employees by direct deposit or if the employee’s vacation is less than one week, employers may pay vacation pay on or before the payday that relates to the pay period in which the employee takes the vacation.

Employers and employees may also agree in writing that the employer will pay vacation pay each period as it accrues. This is allowed as long as the employer clearly indicates the amount of vacation pay separately from other amounts on the employee’s pay statement.

Employers and employees may also agree in writing that the employer will pay vacation pay at any time to which the employee agrees.

Prince Edward Island: At least one day before the employee begins vacation.

Quebec: In a lump sum before the employee begins the vacation. An exception applies for farm workers who are hired by the day. Employers may pay the vacation pay with each pay.

If a collective agreement or decree allows for it, employers may pay vacation pay in another manner.

Saskatchewan: On the employee’s normal payday or, if the employee requests it, before the vacation begins. It may also be paid on each payday as long as the employee agrees.

Yukon: At least one day before the vacation begins.

Note: See each individual jurisdiction for rules around terminations and vacation pay.